Federal Court of Appeal Decisions

Date: 20060127

Docket: A-219-05

Citation: 2006 FCA 36

CORAM:        DÉCARY J.A.

                        SEXTON J.A.                        

                        EVANS J.A.

BETWEEN:

HER MAJESTY THE QUEEN

Appellant

and

MARK STAPLEY

Respondent

Heard at Toronto, Ontario, on January 11, 2006.

Judgment delivered at Ottawa, Ontario, on January 27, 2006.

REASONS FOR JUDGMENT BY:                                                                               SEXTON J.A.

CONCURRED IN BY:                                                                                                  DÉCARY J.A.

                                                                                                                                        EVANS J.A.

Date: 20060127

Docket: A-219-05

Citation: 2006 FCA 36

CORAM:        DÉCARY J.A.

                        SEXTON J.A.                        

                        EVANS J.A.

BETWEEN:

HER MAJESTY THE QUEEN

Appellant

and

MARK STAPLEY

Respondent

REASONS FOR JUDGMENT

SEXTON J.A.

I.           INTRODUCTION

[1]                This is an appeal from Stapley v. Canada, 2005 TCC 374, a Tax Court of Canada ("TCC") decision that allowed the appeal of the respondent in these proceedings, Mark Stapley. The respondent was a real estate agent who provided his clients with gift certificates for food and beverages, as well as tickets to various sporting events and concerts. He neither consumed the food nor attended the entertainment in issue. When computing his income for the 2000, 2001 and 2002 taxation years, he deducted 100 percent of the cost of the food vouchers and tickets. The Minister of National Revenue (the "Minister") disallowed 50 percent of the deductions on the basis of subsection 67.1(1) of the Income Tax Act (the "ITA"). It restricts the deduction of expenditures "in respect of the human consumption of food or beverages or the enjoyment of entertainment" to 50 percent of the lesser of their actual or reasonable cost. The TCC found that the respondent's deductions were not caught by this provision, because his expenses were in respect of earning income and not consumption or enjoyment.

[2]                In this court, the appellant Crown counters that while the expenditures in issue may have been for a business purpose, they were also paid in respect of the human consumption of food and the enjoyment of entertainment. Therefore, they fall within the scope of the deduction limitation in subsection 67.1(1) of the ITA.

II.         FACTS

[3]                During the 2000, 2001 and 2002 taxation years, the respondent was a self-employed real estate agent who marketed and sold residential properties. His business yielded commission income. In the 2000, 2001 and 2002 taxation years, he grossed amounts of $152,270.00, $113,440.00 and $165,610.00, respectively.

[4]                The respondent bought gift certificates for food and beverages and tickets to various concerts and sporting events for clients who had purchased or sold homes through his business. He gave these vouchers and tickets to his clients in the expectation that they would send him more business or refer more clients to him. In other words, the costs of the vouchers and tickets were marketing expenses. The respondent neither consumed the food or beverages obtained through the gift certificates, nor attended the sporting events or concerts to which the tickets provided admission. Indeed, the respondent had no control over how his client recipients used the vouchers and tickets.

[5]                The respondent deducted the costs of the vouchers and tickets - $20,125.00, $14,208.00 and $19,145.00 - for the 2000, 2001 and 2002 taxation years. In February 2004, the Minister reassessed the respondent and increased the respondent's net commission income by $10,062.00, $7,104.00 and $9,572.00 for the respective taxation years. In short, the Minister disallowed 50 percent of the deductions that the respondent had claimed for the gift certificates and tickets, pursuant to subsection 67.1(1) of the ITA.

[6]                The respondent replied with Notices of Objection dated April 20, 2004. The reassessments of tax were confirmed by a Notification of Confirmation of July 23, 2004. On April 12, 2005, the respondent's appeal, pursuant to the Informal Procedure, was heard by the TCC. The next day, the TCC found in favour of the respondent.

III.        LEGISLATIVE PROVISIONS

[7]                At the relevant time, section 67.1 of the Income Tax Act ("ITA") read:

IV.        THE FINDINGS OF THE TAX COURT OF CANADA

[8]                The TCC held that the Minister was wrong to disallow 50 percent of the respondent's claimed deductions of $20,125.00, $14,208.00 and $19,145.00 pursuant to subsection 67.1(1).

[9]                For the TCC, the respondent's purchases were for the purpose of, or in respect of, earning income from his business and not consumption or entertainment. The amount the respondent paid for the vouchers and tickets constituted a reduction in, or a rebate of, his real estate commission. It was a form of discount for the purpose of gaining income. Since the respondent did not participate in the consumption or enjoyment, the purpose of the purchases was "in respect of earning a profit and nothing else."

V.         ANALYSIS

1)             GENERAL PRINCIPLES OF INTERPRETATION

[10]            In its most recent decision on the ITA, Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54 ["Canada Trustco"], the Supreme Court of Canadadiscussed the proper approach to interpreting taxation legislation. In Canada Trustco at para. 10, it commented:

It has been long established as a matter of statutory interpretation that "the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament": see 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804, at para. 50. The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role. The relative effects of ordinary meaning, context and purpose on the interpretive process may vary, but in all cases the court must seek to read the provisions of an Act as a harmonious whole.

[11]            Consequently, this court must examine the grammatical and ordinary sense of the words of subsection 67.1(1), the scheme of the Act and the mischief sought to be cured by the provision to determine whether the respondent's expenditures fall within its ambit.

2)          INTERPRETATION OF SUBSECTION 67.1(1)

a)             THE GRAMMATICAL AND ORDINARY SENSE OF THE WORDS

[12]            According to subsection 67.1(1):

For the purposes of this Act, other than sections 62, 63 and 118.2, an amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment shall be deemed to be 50% of the lesser of . . .

[13]            The appellant contends that nothing in this wording limits the application of the provision to situations in which the taxpayer participated in the consumption of the food or beverages or in the enjoyment of the entertainment. Indeed, the provision certainly does not specify that a particular actor must consume or enjoy the goods in issue for the subsection to apply.

[14]            Moreover, the French version of subsection 67.1(1) indicates that if any person partakes in the purchased food, beverages or entertainment, then the provision is applicable:

Pour l'application de la présente loi, sauf des articles 62, 63 et 118.2, un montant payé ou payable pour des aliments, des boissons ou des divertissements pris par des personnes est réputé correspondre à 50 % du moins élevé du montant réellement payé ou payable et du montant qui serait raisonnable dans les circonstances.                                                                      [emphasis added]

[15]            The plain wording of the subsection thus suggests that there is no requirement of taxpayer use in subsection 67.1(1). Moreover, the words "in respect of" in subsection 67.1(1) are of "the widest possible scope." Nowegijick v. The Queen et al. (1983), 144 D.L.R. (3d) 193 (S.C.C.) ["Nowegijick"] at 200. According to Nowegijick at 200:

They import such meanings as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject- matters.

[16]            Accordingly, even though the respondent's expenditures were for a business purpose, it must also be acknowledged that they were "in respect of" the consumption of food and the enjoyment of entertainment. It seems, then, that the deductions in issue are caught by the plain wording of subsection 67.1(1), even though the respondent's clients consumed the purchased food and entertainment and the respondent did not. A contextual analysis sustains this conclusion.

b)     THE SCHEME OF THE ACT

[17]            Subsection 67.1(1) is a broadly drafted rule to which there are almost a dozen of what can be understood as "exceptions." Three of them are contained in subsection 67.1(1) itself. They address moving expenses (section 62), child care expenses (section 63) and the medical expense credit (section 118.2). Subsection 67.1(2) contains six more exceptions to the general deduction limitation in subsection 67.1(1). Subsection 67.1(3) arguably articulates an exception for fees relating to conferences, conventions, seminars and similar events. Finally, paragraph 67.1(4)(a) excludes amounts relating to airline, train and bus travel.

[18]            In my view, two conclusions can be drawn from this multitude of highly specific exceptions. First, had Parliament intended pure marketing expenditures, such as those in issue, to fall outside the scope of subsection 67.1(1), it clearly would not have been shy about adding a twelfth exception to that effect. However, the respondent's expenses are not covered by any of the exceptions to subsection 67.1(1). Second, at least two of the subsection 67.1(2) exceptions can be taken as suggesting that there is no requirement of taxpayer consumption or enjoyment in subsection 67.1(1). After all, were there such a requirement, these exceptions would be unnecessary.

[19]            For instance, according to paragraph 67.1(2)(a), subsection 67.1(1) does not apply to amounts:

paid or payable for food, beverages or entertainment provided for, or in expectation of, compensation in the ordinary course of a business carried on by that person of providing the food, beverages or entertainment for compensation;

This provision enables a taxpayer whose product is food, such as a restaurant, to deduct the full cost of its promotional samples. Arguably, this clarification would not be required were there a requirement of taxpayer consumption in subsection 67.1(1).

[20]            The same can be said of paragraph 67.1(2)(d), which excises from the deduction limitation in subsection 67.1(1) an amount that:

is required to be included in computing any taxpayer's income because of the application of section 6 in respect of food or beverages consumed or entertainment enjoyed by the taxpayer or a person with whom the taxpayer does not deal at arm's length, or would be so required but for subparagraph 6(6)(a)(ii);

Because of paragraph 67.1(2)(d), the subsection 67.1(1) deduction limitation does not apply if the amount in issue would be included in an employee's income except for subparagraph 6(6)(a)(ii), which relates to employment at a remote location. In other words, an employer can fully deduct an amount paid for meals for employees at a location where, due to its remoteness from any established community, the employee could not reasonably be expected to establish and maintain a self-contained domestic establishment. Paragraph 67.1(2)(d) also exempts from the 50-percent limitation employer-provided allowances or reimbursements for meal or entertainment expenses that must be included in an employee's income. Evidently, this exception contemplates that subsection 67.1(1) speaks to consumption by individuals other than the taxpayer/employer.

[21]            In my opinion, if subsection 67.1(1) only covered cases in which the taxpayer participated in the consumption or enjoyment of the food or entertainment in issue, these two exceptions would be redundant. The legislative scheme thus suggests that subsection 67.1(1) does not contain a requirement of taxpayer use. If this is correct, the respondent would not be permitted to deduct 100 percent of the expenses in issue. This result, however, may not be entirely consistent with the purpose of section 67.1.

c)    THE MISCHIEF SOUGHT TO BE CURED BY THE PROVISION

[22]            Subsection 67.1(1) is a rule that applies to the calculation of income. A taxpayer must include in income, income from a business. Income from a business is defined as the profit from a business. ITA, subs. 9(1). In calculating the profit from a business, a taxpayer cannot deduct personal or living expenses. ITA, para. 18(1)(h). However, a taxpayer may deduct reasonable expenses made for the purpose of producing income from a business. ITA, para. 18(1)(a). Subsection 67.1(1) limits the quantum of paragraph 18(1)(a) deductions with respect to food, beverage and entertainment expenses.

[23]            Logic suggests that subsection 67.1(1) fulfills the following function in the legislative scheme. To reduce the amount of tax owing, a taxpayer will seek to minimize the value of income. One way to do so involves enlarging the size of paragraph 18(1)(a) deductions. Thus, the taxpayer may blend personal and business expenses and attempt to deduct them both as business expenses under paragraph 18(1)(a). For instance, a taxpayer might characterize the cost of a dinner eaten with a client as a wholly-deductible, paragraph 18(1)(a) business expense as opposed to a non-deductible, paragraph 18(1)(h) personal one. Recognizing this, subsection 67.1(1) arbitrarily apportions this kind of "dual-purpose" expense at fifty percent between income-earning and personal expenses.

[24]            Indeed, in Racco Industrial Roofing Ltd. v. Canada, [1997] T.C.J. No. 332 at paras. 4 and 5, Mogan T.C.J. commented :

¶ 4            . . . I shall attempt to determine not the purpose of the Act [the ITA] as a whole but only the purpose of section 67.1. In my opinion, the purpose of section 67.1 can best be determined by looking at the law immediately before its enactment. This section was first enacted in 1988 applicable (generally speaking) to expenses incurred after 1987. Under paragraph 18(1)(a), any non-capital expense incurred for the purpose of gaining or producing income from business or property is deductible in computing income. Specifically, the cost of inviting a customer to lunch or dinner or to a theatrical or sporting event is deductible under paragraph 18(1)(a). By ordinary commercial standards, it is an accepted cost of promoting business akin to advertising. Treating a customer in this manner involves "the human consumption of food or beverages or the enjoyment of entertainment" in the words of subsection 67.1(1).

¶ 5            Before the enactment of section 67.1, any reasonable amount expended on the human consumption of food or beverages or the enjoyment of entertainment was deductible if it satisfied the "purpose" test in paragraph 18(1)(a). After the enactment of section 67.1, any such reasonable amount was deductible only to the extent of 80% [currently 50 percent] even if it did satisfy the "purpose" test in paragraph 18(1)(a), unless it fell within a specific exception in subsection 67.1(2). In Lor-Wes Contracting Ltd. v. The Queen, 85 D.T.C. 5310, the Federal Court of Appeal quoted a statement by the Minister of Finance in the House of Commons as a guide to the interpretation of a specific provision of the Income Tax Act. In this appeal, the origin of section 67.1 can be found in a document entitled "Income Tax Reform" issued by the Minister of Finance on June 18, 1987 in which he stated his intention to limit the deduction for "business meals and entertainment expenses". The document states at page 86:

As part of broadening the tax base to permit lower tax rates, the deduction for business meals (including food and beverages) and entertainment expenses (such as accommodation at a resort and tickets for the theatre, a concert, athletic event or other performance) will be limited to 80 per cent of their cost.

...

Business meals and entertainment involve an element of personal consumption and therefore some part of their cost can properly be characterized as a personal expense that should not be deductible. While it is difficult to ascertain what portion of the cost of meals and entertainment represents personal consumption, it is clear that a full deduction for such expenses simply because they are undertaken in the course of business allows the write-off of some part of expenses that are of a personal nature. Many countries have limited the deductibility of meals and entertainment expenses. For example, similar restrictions currently apply in the United Kingdom, Australia and the United States.

Section 67.1 with its 80% limitation was enacted in 1988 as a direct consequence of the Minister's proposal for income tax reform announced on June 18, 1987.

[emphasis added]

[25]            Other extrinsic evidence affirms Mogan T.C.J.'s understanding of the purpose of section 67.1. For instance, according to December 1987 Tax Reform Supplementary Information:

Currently, a taxpayer may deduct reasonable expenses for meals and entertainment incurred for business purposes. The present law effectively allows a deduction for some part of expenses that are personal in nature since business meals and entertainment necessarily involve an element of personal consumption.

The White Paper proposed to limit the deduction for these expenses to 80% of their cost. The 80% limitation would apply to all business meals, including food and beverages, as well as to the cost of meals while travelling or attending a seminar, conference, convention or similar function. As well it would apply to tickets to an entertainment or sporting event, gratuities and cover charges, room rentals to provide entertainment, and the cost of private boxes at sports facilities. Where a taxpayer is reimbursed for the cost of a business meal or entertainment, the 80% limitation would apply to the person making the reimbursement.

...

The restriction proposed received general support. It was also noted that similar, and in some cases more severe, restrictions apply in other countries. However, the Commons and Senate committees recommended that these expenses be deductible in full for persons in travel status.

The government gave careful consideration to these suggestions but rejected the notion that out-of-town meals and entertainment should be excluded from the restriction, since they too involve an element of personal consumption. The government intends to proceed with the 80% limitation on business meals and entertainment expenses as proposed in the White Paper.

[emphasis added]

[26]            Budget Supplementary Information from 1994 is in a similar vein:

The Canadian income tax system allows deductions for reasonable expenses incurred for the purpose of earning income from business, property or, in certain circumstances, employment. The deduction with respect to business meals and entertainment expenses is currently restricted to 80% of such expenses to reflect the fact that they contain an element of personal consumption.

A similar restriction applies for the purposes of the Goods and Services Tax (GST) [section 236 of the Excise Tax Act -- ed.] so that effectively only 80% of the GST paid on business meals and entertainment expenses may be recovered as an input tax credit. [This does not apply to registered charities-ed.]

The government believes the tax system will be made fairer, and will better reflect the personal consumption element, by reducing the income tax deduction and the GST input tax credit for eligible business meals and entertainment expenses from 80% to 50%. This restriction will apply to expenses in respect of meals, beverages and entertainment consumed or enjoyed after February 1994.

[emphasis added]

[27]            The respondent did not consume the food or enjoy the entertainment in issue. Therefore, he was not attempting to deduct any personal or living expenses under the guise of business ones. In other words, his deductions are not an abuse targeted by subsection 67.1(1). A purposive approach, then, favours upholding the TCC's decision in this case.

d)          CONCLUSIONS ON THE QUESTION OF INTERPRETATION

[28]            While the first two interpretive aids-the plain meaning of the provision and the scheme of the legislation - suggest that the respondent's deductions are limited by subsection 67.1(1), the object of the provision leads to the opposite conclusion. In suggesting how to resolve these types of conflicts in Canada Trustco at para. 12, the Supreme Court of Canada quoted approvingly from 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804 at para. 51 (citing P. W. Hogg and J. E. Magee, Principles of Canadian Income Tax Law (2nd ed. 1997), at 475-76):

It would introduce intolerable uncertainty into the Income Tax Act if clear language in a detailed provision of the Act were to be qualified by unexpressed exceptions derived from a court's view of the object and purpose of the provision.

[29]            Given that the respondent's expenditures do not fall under any of the express exceptions to subsection 67.1(1), I must find that he can only deduct 50 percent of them. The conclusion that his expenditures are caught by subsection 67.1(1) is confirmed by Structures G.B. Ltée v. Canada, [1996] T.C.J. No. 793 at paras. 11 and 12, wherein the TCC stated:

¶ 11          Secondly, counsel for the appellant argued that section 67.1 of the Act was intended to apply to entertainment expenses such as business meals and entertainment in which there was a personal component of enjoyment for the payer. He thus argued that the section does not apply in cases where the expenditure is made essentially for work purposes. This argument is not without weight, especially if one considers the title of section 67.1 of the Act: "Expenses for food, etc."

¶ 12          However, nothing in the wording of subsection 67.1(1) of the Act limits its application to amounts paid for food and beverages for entertainment purposes. Further, as counsel for the respondent noted, the list of exceptions described in subsection 67.1(2) of the Act, and especially in paragraph 67.1(2)(d), which excludes application of the 80 percent proportion in subsection 67.1(1) of the Act to food which must be included in calculating an employee's income, leads the Court to conclude that subsection 67.1(1) of the Act applies to any expense relating to food, beverages or entertainment.

[internal citations omitted]

[30]            Nevertheless, I would like to note that, in my respectful opinion, it seems unfair to cut the respondent's deductions in half. The respondent could have purchased flowers or books for his clients and deducted 100 percent of their costs. Likewise, he could have fully "deducted" rebates on his real estate commission or gifts of cash to his clients. Thus, in its current form, section 67.1 interferes with taxpayers' business decisions and in particular, how they allocate their marketing budgets. It provides them with an incentive to forgo purchasing gifts of food and entertainment for the purpose of building and maintaining their client relationships. It is conceivable that the imposition of the arbitrary deduction limit of 50 percent can be justified for administrative reasons - that is, it could be too difficult in every case to determine what proportion of an expense was for personal consumption, if any. To achieve an equitable result, one might have thought that Parliament would have enabled the taxpayer to file evidence to rebut a presumption that the subsection 67.1(1) deduction limit applies.

[31]            In any event, the statute dictates the result in this case. While the respondent's expenses may have been in respect of producing income from a business, they were also "in respect of the human consumption of food or beverages or the enjoyment of entertainment." Therefore, they are caught by subsection 67.1(1) of the ITA.

[32]            The appeal should be allowed, the decision of the TCC should be set aside and the taxpayer's appeal from the assessments of tax should be dismissed. In accordance with section 18.25 of the Tax Court of Canada Act, the respondent should be awarded reasonable and proper costs on this appeal.

"J. Edgar Sexton"

"I agree

       Robert Décary J.A.".

"I agree

     John M. Evans J.A.".

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                                                                               A-219-05

STYLE OF CAUSE:                                                               Her Majesty the Queen v. Mark Stapley

PLACE OF HEARING:                                                         Toronto, Ontario

DATE OF HEARING:                                                           January 11, 2006

REASONS FOR JUDGMENT BY:                                      SEXTON J.A.

CONCURRED IN BY:                                                          DÉCARY J.A.

                                                                                                EVANS J.A.

DATED:                                                                                  January 27, 2006

APPEARANCES:

Catherine Letellier de St. Just	FOR THE APPELLANT
Laurie L. Aitchison	FOR THE RESPONDENT

SOLICITORS OF RECORD:

John H. Sims Q.C. Deputy Attorney General of Canada Ottawa, Ontario	FOR THE APPELLANT
Aitchison Law Office Oshawa, Ontario     L1J 8L8	FOR THE RESPONDENT